Supercuts 2005 Annual Report Download - page 85

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company’s fair value hedges are recorded at fair value within other assets in the Consolidated Balance Sheet, with a corresponding
cumulative adjustment to the underlying senior term note within long-term debt of $0.6 and $2.4 million at June 30, 2005 and 2004,
respectively. No hedge ineffectiveness occurred during fiscal year 2005 or 2004. As a result, the fair value hedges did not have a net impact on
earnings.
Hedge of Net Investments in Foreign Operations
The Company has numerous investments in foreign subsidiaries, and the net assets of these subsidiaries are exposed to exchange rate
volatility. The Company frequently evaluates its foreign currency exchange risk by monitoring market data and external factors that may
influence exchange rate fluctuations. As a result, the Company may engage in transactions involving various derivative instruments to hedge
assets, liabilities and purchases denominated in foreign currencies. At June 30, 2005, the Company had a cross-currency swap with a notional
amount of $21.3 million to hedge a portion of its net investments in its foreign operations. The purpose of this hedge is to protect against
adverse movements in exchange rates. The cross-currency swap hedged approximately nine and seven percent of the Company’s total net
investments in foreign operations at June 30, 2005 and 2004, respectively.
The Company’s cross-currency swap is recorded at fair value within other noncurrent liabilities in the Consolidated Balance Sheet. At
June 30, 2005 and 2004, the Company’s net investment in this derivative financial instrument was in an $8.5 and $8.7 million loss position,
respectively, based on its estimated fair value. The corresponding tax-effected offset is charged to the cumulative translation adjustment
account, which is a component of accumulated other comprehensive income set forth under the caption shareholders’ equity in the
Consolidated Balance Sheet. The cumulative tax-effected net loss recorded in accumulated other comprehensive income related to the cross-
currency swap was $6.9 and $6.3 million at June 30, 2005 and 2004, respectively. For the years ended June 30, 2005, 2004 and 2003, $0.6,
$2.2 and $2.7 million of tax-effected loss related to this derivative was charged to the cumulative translation adjustment account, respectively.
6. COMMITMENTS AND CONTINGENCIES:
Operating Leases:
The Company is committed under long-term operating leases for the rental of most of its company-owned salon locations. The original
terms of the leases range from one to 20 years, with many leases renewable for an additional five to ten year term at the option of the Company,
and certain leases include escalation provisions. For certain leases, the Company is required to pay additional rent based on a percent of sales in
excess of a predetermined amount and, in most cases, real estate taxes and other expenses. Rent expense for the Company’s international
department store salons is based primarily on a percent of sales.
The Company also leases the premises in which the majority of its franchisees operate and has entered into corresponding sublease
arrangements with the franchisees. These leases, generally with terms of approximately five years, are expected to be renewed on expiration.
All additional lease costs are passed through to the franchisees.
The Company recently entered into a lease agreement for a 102,448 square foot building, located in Edina, Minnesota. The Company will
begin to recognize rent expense related to this property upon the date that it obtains the legal right to use and control the property. The original
lease term ends in 2015 and the aggregate amount of lease payments to be made over the original lease term are approximately $9.7 million.
The lease agreement includes an option to purchase the property or extend the original term for two successive periods of five years.
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